Why build a new startup or partner with one, when you may already have the most important advantages you need to successfully renew your business in house? asks Lysander Weiss, partner at Venture Idea, the German innovation and strategy consultancy. Companies just have to learn how to use their own assets better for innovation. But that is easier said than done.
In their 2018 book, Das Comeback der Konzerne (The English version, The corporates strike back, will be published in 2021 with Springer), Weiss and his business partner Lucas Sauberschwarz explained why companies shouldn’t pin all their hopes on working with or creating a disruptive new startup. Startups are hard to make work. The statistics are discouraging. According to an extensive study by Bain, a new startup has only a 1 in 500 chance of becoming big enough to make a substantial value contribution of €100m or more.
A CBInsights study in 2018 supports this. Of 1100 tech startups they followed, some 67% died or stalled, and only 1 per cent reached unicorn status.
Unfortunately, these are the kind value contributions that an established company needs, an innovation lab is really to contribute to future revenues. Small business successes of a few million euros may be a positive outcome for an independent founder, but it won’t save the future of a large corporation.
Luckily, a corporate-backed project has about 1 in 8 chance of reaching these kinds of returns if it is connected to the core business. After all, an existing business has all sorts of advantages such as established brand recognition, existing customers and distribution.
However, to make efficient use of these assets, a separate innovation lab is not enough. Innovation must address both the external market and customer needs and the internal capabilities by becoming an inherent part of the company's strategy. That is why Weiss advises companies to start (or transform existing innovation departments into) a strategy lab instead— a unit with a specific process that can balance innovation better with the core business and the emerging customer and market needs.
Sifted caught up with Weiss to ask him to explain the concept further and learn about his upcoming study about it with the HHL Graduate Management School Leipzig, which he invites Future Proof readers to take part in.
Why has the “strategy lab” for efficient innovation become your key approach to innovation?
I’ve seen the challenge unfold over the last few years of working with a number of established businesses. A lot of companies started innovation activities whether they were innovation labs or accelerator programmes, but they have struggled to get impact from them. These efforts have been too separate from the core business and its strategy based on the belief that they need the freedom to be innovative.
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When we go in to work with companies we often find that they just want to scout for new startups or to create new ventures from scratch. They want to disrupt the core business, because that is what they hear they must do. We try to tell them that they need to think about using what they already have first to build future competitive advantage
So — how does it work?
We start with connecting to the top management, not to pitch our ideas but to hear from them what the main goals are for their strategic business. We start from these objectives. A lot of innovation programmes measure success by ambiguous criteria such as how many new ideas they generate, but the number of ideas doesn’t matter if they aren’t aligned to strategic objectives. In the end, the top management will support projects that have a clear potential of increasing their objectives, and no others!
When the strategic frame is set, we collect and analyse all the various internal and external factors that influence company, and translate them into new strategic options. It is a process that is rather complex, but takes just a few weeks, so it is very efficient in that way to get a real picture of all possible future opportunities - and select the ones with the highest potential for the strategic objectives. Afterwards, we have the so-called “5C-process” to translate selected strategic options into concrete innovation or venturing projects and execute on them, which includes all the scouting, customer insights and test one may expect from such a process. But the first step really is the most important, as it provides the required focus and balance between existing and new business that we need for success.
For example, we are currently working with an established, fast growing player in the digital fitness industry who wanted support in launching a new venture. After the first step, we now have already 5 strategic options that address new trends and contribute to the core business positioning, which can each double their revenues in the coming years. As a result, the objective for the project now increased towards tripling their revenues in the coming years.
Is it hard to convince companies to rethink their ideas on innovation?
If someone really wants to build startups and disrupt the core business, it is very difficult to convince them not to. There’s probably no point trying to dissuade them, it is likely they will have to try it first before they will think about a different option.
Many have tried it already, however, and realised that the impact is still missing. It may also be the coronavirus crisis that increases the need for true strategic renewal in many companies and makes them look closer on how to integrate innovation better in their main strategy.
However, we also try to meet everybody where they stand. This works because we are not saying that we wouldn’t recommend building or buying a startup. Sometimes there is a startup that is doing exactly what you want. It is just that we don’t start with that as a goal, but instead set the strategic frame and evaluate all options before to make sure that a startup is the right choice.
For example we helped the German energy company Innogy to create a blockchain startup focused on mobility. Having Innogy’s backing helped us onboard a lot of big companies, but over time it became clear that in order to get a lot of partners for a decentralized network, it needed to be more independent. It made sense for this to become a separate business, in this case the Share and Charge Foundation.
Is this “efficient innovation” approach a less expensive option for companies?
The advantage is that a “Strategy lab” can start with a very small team, and than expand with the required capabilities based on the exact needs of the identified innovation portfolio. So companies can save on a lot of “innovation theater” with projects that don’t contribute to the business.
After, the venturing process itself is not necessarily less expensive than building a new startup on the greenfield, but it is a lot more efficient because it is easier to scale when it is build at least partly on existing assets of the company.
We have worked on more than 60 projects — including working with half the companies in the DAX — now and have already had some successful business ventures out of this approach, so I would say that we’re definitely doing better than that 1 in 500 chance for startup success.
Often, we are even just doing the first step of defining the strategic options, which already brings a huge added value to many companies, because it is the first time they have a clear overview of their existing and possibly new strategic innovation projects and can allocate their resources accordingly.
For example, we are currently working for a major automotive supplier with a R&D and innovation budget of over €500m. They are now using our strategic approach to evaluate all long term strategic options continuously to focus the resources and invest the most relevant opportunities from the very beginning, instead of realizing what adds value only afterwards.
And now you are looking to do more research in this area?
This is part of my PhD research at HHL Leipzig Graduate School of Management. I wanted to look at how we could design better processes and structures for aligning innovation and strategic renewal of organisations, so called exploration and exploitation. I am speaking to companies across different industries about how they organise their innovation and venturing activities now, and how they connect to the existing business as well as the outside of the company to be able to classify different approaches.
I am looking for more participants in the study, so if you are from a corporate innovation or venturing unit, please get in touch!